Introduction
A Section 125 plan provides valuable tax benefits, but staying compliant with IRS regulations is essential to maintaining those benefits. For employers, ensuring compliance may seem daunting, but understanding the key requirements and best practices can make the process easier. This guide offers practical steps to help employers keep their Section 125 plan compliant and running smoothly.

Understanding Qualified Benefits
The IRS restricts which benefits can be included in a Section 125 plan. Only qualified expenses—such as health insurance premiums, dependent care, and flexible spending accounts—are eligible for pre-tax treatment. Including non-qualified expenses can result in tax penalties and disqualification of the plan.

• Tip: Review your plan offerings regularly to ensure only eligible expenses are included. For instance, items like employee discounts or bonuses do not qualify under Section 125.

Non-Discrimination Testing
Section 125 plans must pass three IRS-mandated non-discrimination tests each year to ensure that benefits do not disproportionately favor highly compensated employees (HCEs) or key employees. These tests evaluate whether benefits are offered equally to all employees.

• Key Tests:
  1. Eligibility Test: Ensures all employees have equal access to the plan.
  2. Contributions and Benefits Test: Verifies that contributions are proportionate across income levels.
  3. Key Employee Concentration Test: Ensures that benefits do not heavily favor executives or highly compensated employees.

Documenting and Updating Your Plan
A compliant Section 125 plan must have a written plan document outlining the benefits offered, eligibility criteria, and election rules. This document serves as the official record of the plan and should be updated annually to reflect any changes.

• Tip: Regularly update your plan document and distribute copies to employees. If the IRS requests documentation, having an updated and thorough plan document will help ensure compliance.

Monitoring Election Changes
Employees typically select their benefits at the start of the plan year. However, mid-year changes are only allowed under specific circumstances, such as marriage, the birth of a child, or a change in employment status. Allowing changes outside of these “qualifying life events” may result in compliance issues.

• Tip: Educate employees on the rules for making election changes. Ensuring employees understand qualifying life events will prevent misuse of the plan and help keep the plan compliant.

Data Security (HIPAA Compliance)
If your Section 125 plan includes health-related benefits, it’s essential to comply with the Health Insurance Portability and Accountability Act (HIPAA) to protect employee data. Failing to protect personal health information (PHI) can lead to penalties and loss of employee trust.

• Tip: Use secure, HIPAA-compliant software for plan administration and ensure that only authorized personnel have access to sensitive data.

Conclusion
Maintaining compliance for a Section 125 plan is essential for protecting tax benefits and ensuring that employees can make the most of their pre-tax options. By understanding qualified benefits, conducting non-discrimination testing, updating documentation, monitoring election changes, and safeguarding data, employers can keep their plan compliant and effective. Working with a benefits administrator or compliance specialist can further simplify the process and ensure peace of mind.